WSG Article: Changes under the Franchise (Amendment) Act 2020

Shearn Delamore & Co.
July 6, 2020 - Malaysia

Changes under the Franchise (Amendment) Act 2020
by Yap Khai Jian

The Franchise Act 1998 (FA) has been the main source of legislation which governs franchise businesses and the relationship between a franchisor and franchisee in Malaysia for more than 20 years.

On 3 December 2019, the Franchise (Amendment) Bill 2019 was passed by the Lower House of the Parliament and received Royal Assent on 20 February 2020. Subsequently, the Franchise (Amendment) Act 2020 (the Amendment Act) was gazetted on 6 March 2020. Some of the changes under the Amendment Act are as follows.

The concepts of subfranchise and subfranchisee

The Amendment Act expressly recognises the concepts of “subfranchise” and “subfranchisee” by conferring on these terms their corresponding definitions. These definitions can be found in section 3(d) of the Amendment Act, which are reproduced as follows:

“‘Subfranchise’ means ‘a franchise granted by a master franchisee to a subfranchisee for business purposes under the Act’; and

‘Subfranchisee’ means ‘a subfranchise holder’.”

Registration of a foreign franchisor

Under the existing section 54(1) of the FA¹, a foreign franchisor who intends to offer its franchise to a local entity in Malaysia must obtain an approval from the Franchise Registry. In practice and, according to MyFex online registration, section 6(1) of the FA was thought to apply only to local franchisors.

That position, however, was rejected by the High Court in the case of Dr HK Fong BrainBuilder Pte Ltd v SG-Maths Sdn Bhd² where the High Court held that section 6(1) should apply equally to foreign franchisors; otherwise, it would leave the franchisees of the foreign franchisors in a position worse off than the franchisees of the local franchisors³.

The amendment that is sought to be made by section 4 of the Amendment Act to section 6(1), and which in essence sought to include “foreign person who has obtained an approval to sell a franchise in Malaysia or to any Malaysian citizen under section 54”, appears to firm up the High Court’s view.

With this amendment, it would appear that a foreign franchisor, having obtained the necessary approval from the Franchise Registry to offer its franchise in Malaysia under section 54 of the FA, would now be required under the Amendment Act to file an application to register its foreign franchise pursuant to the newly revised section 6 of the FA, resulting in potentially double registrations.

Be that as it may, this purported “double registrations” does not affect a foreign franchisor which had obtained approval under section 54(1) of the FA before the coming into force of the Amendment Act. It remains to be seen how this would work in practice.

Registration of a franchisee

Section 6B(1) of the FA⁴ imposes an obligation on franchisees of local franchisors to register the franchise with the Franchise Registry. Such obligation is couched in mandatory terms owing to the use of the word “shall”. Notwithstanding this, section 6 of the Amendment Act⁵ further introduces a new subsection to section 6B of the FA which seeks to impose penalties against franchisees who fail to comply with section 6B(1).

It is thus important for a franchisee (who has been granted a franchise from a local franchisor or local master franchisee) to register the franchise to avoid being penalised by the Franchise Registry⁶.

Requirements of a franchise agreement

For a franchise agreement to be valid, certain information are to be included in a franchise agreement as provided under section 18(2) of the FA. This would include, but are not limited to, the following:

the name and description of the product and business under the franchise;
the territorial rights granted to the franchisee;
the franchise fee, promotion fee, royalty or any related type of payment which may be imposed on the franchisee, if any;
the obligations of the franchisor;
the obligations of the franchisee;
the franchisee’s rights to use the mark or any other intellectual property, pending the registration or after the registration of the franchise;
the conditions under which the franchisee may assign the rights under the franchise;
a statement on the cooling-off period as provided in section 18(4) of the FA;
a description pertaining to the mark or any other intellectual property owned or related to the franchisor which is used in the franchise;
if the agreement is related to a master franchisee, the franchisor’s identity and the rights obtained by the master franchisee from the franchisor;
the type and particulars of assistance provided by the franchisor;
the duration of the franchise and the terms of renewal; and
the effect of termination or expiration of the franchise agreement

Section 18(3) of the FA further provides that failure to include the abovementioned information in a franchise agreement shall render the franchise agreement null and void. This drastic effect was removed by section 14 of the Amendment Act.

Implicit in this removal is the suggestion that a franchise agreement need not necessarily be null and void if it omits any of the information outlined under section 18(2). Needless to say, it is still prudent for a franchise agreement to contain the abovementioned information not only because they comprise information which are practical for the operation of a franchise business but also owing to the usage of the word “shall” in section 18(1) of the FA which indicates the mandatory nature of the provision.

Renewal of franchise

Pursuant to section 10 of the FA, the registration of franchise shall continue to be effective unless the Registrar issues a written order to the franchisor, to suspend, terminate or cancel the registration of the franchise. In other words, there is no requirement to renew a registered franchise under the current FA unless the Registrar of Franchise (Registrar) issues a written order in this regard.

Sections 8 and 9 of the Amendment Act revamp the period of effectiveness of a registered franchise by amending section 10(1) of the FA⁷ and introducing a new provision, that is, section 10A regarding the renewal of a franchise⁸. With these amendments:

The registration of a franchise will be effective for a prescribed period as determined by the Registrar;
Within 30 days from the expiration date of such registration, the franchisor may apply to the Registrar for the renewal of the registration of franchise, and
The approval for such renewal would be subject to the conditions that may be imposed by the Registrar.

Display of registration of franchise

Section 9 of the Amendment Act⁹ further introduces a new obligation on the franchisor and franchisee to display the registration of a franchise in a conspicuous position at the place where the franchisor or franchisee carries on his business. The non-compliance of such requirement by the franchisor or franchisee would constitute an offence.

Conclusion

It is without doubt that the introduction of the Amendment Act attempts to reinforce the reach of the FA. As certain amendments impose penalties in the event of non- compliance, it is prudent for franchisors (local or foreign) and franchisees to observe these requirements before operating their franchise businesses in Malaysia.

Written By:

Yap Khai Jian

Intellectual Property Group

For further information regarding intellectual property matters, please contact our Intellectual Property Practice Group.

Footnotes:

1.Section 54(1) of the FA provides that: -

“A foreign person who intends to sell a franchise in Malaysia or to any Malaysian citizen shall submit an application to the Registrar.”

2. [2018] 11 MLJ 701.

3. Justice Wong Kian Kheong at page 726 of the case of Dr HK Fong BrainBuilder Pte Ltd v SG-Maths Sdn Bhd [2018] 11 MLJ 701 held as follows:

“Accordingly, I cannot accept the submission by the plaintiff’s learned counsel that s 6(1) of the FA applies only to local franchisors. Such a submission is contrary to the purposive construction. Furthermore, if I have acceded to such a submission:

this will create an absurdity wherein local franchisors have to register their franchises with the Registrar under s 6(1) of the FA but foreign franchisors are exempted from such a requirement. Under s 58 of the FA, only the ‘Minister’ (defined in s 4 of the FA as the Minister for the time being charged with the responsibility for matters relating to franchises) may exempt a franchisor, local and foreign, from the requirement of registration under s 6(1) of the FA; and

this will cause an injustice to franchisees of foreign franchises (as compared to franchisees of local franchises who are required to be registered under s 6(1) of the FA). This is because if a foreign franchisor is not required to register the foreign franchise with the Registrar under s 6(1) of the FA, the foreign franchisor may wriggle out from compliance with mandatory provisions legislated by Parliament in FA for the protection of franchisees of foreign franchises;…”

4. Section 6B(1) of the FA states that: -

“A franchisee who has been granted a franchise from a local franchisor or local master franchisee shall register the franchise with the Registrar by using the prescribed registration form within fourteen days from the date of signing of the agreement between the franchisor and franchisee.”

5. Section 6 of the Amendment Act provides that:

“The principal Act is amended by substituting for section 6B the following section: - 6B(2) Any franchisee who fails to comply with subsection (1) commits an offence.”

6. Section 39(1) of the FA provides that:

“A person who commits an offence under this Act for which no penalty is expressly provided shall, on conviction, be liable –

if such person is a body corporate, to a fine of not less than ten thousand ringgit and not more than fifty thousand ringgit, and for a second or subsequent offence, to a fine of not less than twenty thousand ringgit and not more than one hundred thousand ringgit; or

if such person is not a body corporate, to a fine of not less than five thousand ringgit and not more than twenty- five thousand ringgit or to imprisonment for a term not exceeding six months, and for a second or subsequent offence, to a fine of not less than ten thousand ringgit and not more than fifty thousand ringgit or to imprisonment for a term not exceeding one ”

7. Section 8 of the Amendment Act provides that: -

“The principal Act is amended by substituting for section 10 the following section:

Period of effectiveness

10(1) The registration of a franchise shall continue to be effective for a period as may be prescribed. (emphasis added)

(2)Notwithstanding subsection (1), the Registrar may at any time issue a written order to the franchisor to suspend, terminate or cancel the registration of the franchise under this Act."

8 Section 9 of the Amendment Act provides that: -

“The principal Act is amended by inserting after section 10 the following sections: Renewal of registration of franchise

10A(1) A franchisor may apply to the Registrar for renewal of the registration of franchise by submitting an application in such form as may be determined by the Registrar together with the prescribed fee within thirty days from the expiration date of such registration.

An approval for the application made under subsection (1) may be subject to such conditions as the Registrar may

Upon approving the application under subsection (1), the Registrar may require the applicant to pay such amount of fee as may be

Section 10 shall apply to the period of effectiveness of the registration of franchise which is renewed under this ”

9. Section 9 of the Amendment Act provides that: -

“The principal Act is amended by inserting after section 10 the following sections:

“Display of registration of franchise

10B(1) A franchisor or franchisee shall at all times display the registration of franchise in a conspicuous position at the place where the franchisor or franchisee carries on his business.

(2) Any franchisor or franchisee who fails to comply with subsection (1) commits an offence.”

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